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Final order on BAA break-up

As expected, the UK Competition Commission has finally released its order on breaking up British airport behemoth BAA. (Warning: very large PDF.) I’ve blogged a number of times on this issue in the past, andtheseposts will be good places to start if you’re new to the issue. Here are the key remedies for the adverse effect on competition posed BAA’s ownership of the three main London airports and three of Scotland’s busiest airports:

The sale of both Gatwick and Stansted airports, each to different purchasers: “Divestment of one of Gatwick or Stansted would leave around 60 per cent of London’s runway capacity in BAA’s hands and would not comprehensively remedy the AEC we have identified because BAA would continue to own two airports that would otherwise substantively compete with each other under separate ownership.” BAA has already moved to sell Gatwick. (Forcing BAA to divest Heathrow was never on the table.)

The sale of either Edinburgh or Glasgow airport. As for the timeframe of these divestitures, BAA wants to put the Stansted sale ahead of the Scotland sale so that Stansted can move forward with tentative expansion: “Following the completion of the Gatwick sale process, we would require the divesti-ture of Stansted earlier than that of either of the Scottish airports due to its relative scale and importance in addressing the AEC and detriments we have found and in the interests of resolving uncertainty with respect to the planning inquiry for a new runway at Stansted so as to facilitate the development of capacity as soon as it may be required.”

To address airline complaints about poor service at Heathrow, the UK aviation regulator — the Civil Aviation Authority (CAA) — should “strengthen consultation processes and provisions on quality of service.”

“In relation to the economic regulation of airports, we fully support a licensing regime of the kind favoured by the DfT with different licence obligations for airports of different sizes and market power, as it would introduce more flexibility to the regulation of airports. In particular, under such a regime, the regulator would be able to relax the intensity of regulatory scrutiny, where it saw opportunities for increased competition.” The commission adds that the primary duty of the CAA is to consumers, with only an ancillary duty to airlines.

The more interesting part of this report is seeing how, in crafting these final remedies, the Competition Commission weighed the submissions of BAA and other parties. BAA suggested congestion pricing as a means of reducing heavy traffic at peak times, but the commission rejected this argument: “We do not view peak-pricing and/or making maximum use of existing runway capacity as an end in itself (particularly if it results in poor service quality). Rather we view spare runway capacity, the size of which depends on the efficiency of runway utilization, as a factor which may facilitate competition between airports and, in so doing, ensure the best possible outcomes for customers in terms of pricing, service and innovation.” I agree. Peak pricing is the fairest and most rational way of allocating sparse air traffic capacity on an interim basis, but the goal for governments should be to ensure sufficient infrastructure to meet demand. If, as the Competition Commission charges here, BAA’s structure inhibits this process, then it should be amended.

BAA also suggested tweaks to regulation in order to improve incentives for runway and terminal development. The response warms this blog’s heart: “[A] regulatory system with further refinements will remain an imperfect and uncertain mimic of competitive rivalry.” Also suggested by BAA: keeping the airports in BAA’s hands but imposing arbitrary barriers in management and finances between them. This is self-serving, and not much different than full divestiture; the commission adds that enforcing this structure would prove an “onerous” regulatory burden. “In general we note, with reference to BAA’s proposals of alternatives to divestiture, that although these proposals may provide advantages in alleviating certain areas of detriment in the short term, they are ineffective in providing the comprehensive long-term solution that we are required to seek.”

BAA realized the writing was on the wall for Gatwick and moved to put it up for sale, but it tried to hold on to Stansted, arguing that BAA has a “clear commitment” to increasing runway capacity at both Stansted and Heathrow. The CAA responded that

there were likely to be significant gains from competition, even in the short term, as a result of divestiture, although the precise nature and scope of these gains might be difficult to identify in advance. In its view, one benefit of the separate ownership of all three of BAA’s London airports, which would necessitate divesting Stansted in addition to Gatwick, would be the increased incentives on the owners of the airports to respond appropriately to the growth in demand and to bring forward appropriate investment plans to meet the demand in an efficient manner. Under separate ownership, there would also be sharper incentives to innovate.

These are the highlights; there’s much more and interesting throughout. Other readers may be more interested in the decision on the Scottish airports, which is small potatoes compared to Heathrow/Gatwick/Stansted. In the next several years, we will have a chance to observe how three privately and independently owned major airports in an enormous air travel market compete with one another and develop their passenger and aircraft capacity while maintaining competitive customer quality. Port Authority of New York and New Jersey, are you watching?